Managing Your Organization’s Culture During Rapid Growth

Charles Soranno - MD New Jersey

By Charles Soranno, Managing Director
Financial Reporting Compliance and Internal Audit

 

 

Early in December 2016, I had the pleasure of leading an in-depth webinar exploring how fast-growing companies can prepare for challenges related to changes in their culture and talent requirements, particularly when ramping up for an IPO or following one.

I was joined by Carmela Krantz, Vice President of Human Resource at WideOrbit; Danielle Soucek, Director of Insight Product at Equilar; and Michael Waxman-Lenz, CFO at Undertone. Together, we provided analysis and guidance on how to create the right team, scale for growth, benchmark against peers and competitors, and develop a public company mindset.

As companies implement their growth plans in the new year, it’s worth revisiting a few of the big ideas that emerged from the event.

Building the Right Team – Recognize the Influences
An organization’s ownership structure, its industry dynamics, and whether it has a domestic or global presence shape its culture and need for certain skillsets. Challenges typically emerge when companies bring in new investors, prepare to launch an IPO, add locations, or significantly expand their employee base.

Ownership has a tremendous impact on what the right team looks like, for example. A closely held startup may not have formal financial reporting requirements, but as it attracts institutional capital or registers for a public offering, more specialization and structure is required as expectations and demands change. Institutional investors likely will be less forgiving of reporting errors than founders working in a close-knit setting, and companies that execute their IPOs have to meet strict Securities and Exchange Commission (SEC) regulatory, compliance and reporting requirements. Will free-thinking, entrepreneurial-oriented individuals who were involved in virtually all aspects of a startup’s early development be able to not just perform, but thrive, in this more regimented operating environment?

Scale for Growth
Maintaining robust and consistent communications and formal communication protocols (especially for public companies) between an organization’s leaders and its workforce – even to the point of “over communicating” – is perhaps the most important strategy human resources (HR) can promote when employment rosters are expanding by the dozens each month. Letting employees know how they fulfill a company’s mission during times of rapid change keeps them plugged-in, motivated and contributing to desired business outcomes.

Staying ahead of the recruiting battle is another critical step HR can take. Human resource managers and recruiters must work closely with the C-suite to better understand the dynamics of the growing company and the mindset – not just skillset – required to make new hires successful. Also, by keeping employees informed of open positions and using referral incentives, HR can make all employees recruiters. This strategy can help fill jobs more quickly and often nets candidates of a certain caliber that have a higher chance for success.

Benchmark Growth
Compensation practices change dramatically after a company prepares for and ultimately completes an IPO, typically moving from less structured to more formal, documented programs designed to secure and retain talent. The scrutiny, by the SEC and others, of publicly available post-IPO executive compensation data requires organizations to balance shareholder interests with rewarding executives fairly.

One of the best ways to strike that balance begins with defining the talent market by selecting a peer group survey or collecting proxy data, or by combining both methods. Many companies utilize compensation consultants that can provide the data. Often, the advisors also understand how less tangible factors, such as management philosophy and individual performance, may influence pay packages.

Get a Head Start
While an IPO may be the last thought on the minds of executives running rapidly growing companies, especially early-stage companies, operating as if an transaction is imminent can make organizations more attractive and valuable when investors begin to take interest. Steps companies can take in that direction include developing a solid IT and finance infrastructure, assembling superb finance and operations teams, establishing excellent corporate governance, and developing a public company mindset among employees.

Of these initiatives, developing sustainable and scalable IT infrastructure and strong finance and accounting teams are among the most critical. However, infrastructure also encompasses making sure a company’s organizational chart is balanced and determining whether special technical or general needs should be outsourced. Organizations also need to be aware of pitfalls that could derail the development of a transaction-ready public company mentality. Underestimating the effort required not just before, but also after the IPO, is chief among them.

Learn More
Rapidly growing companies face a number of challenges as they transition from freewheeling entrepreneurial startups to more structured, efficient and mature operations. By preparing for headwinds associated with changing cultures, they can put themselves in a better position for success. Listen to the recorded webinar for a deeper dive into the ideas discussed here.

So You’ve Gone Public – What’s Next?

Steve HobbsBy Steve Hobbs, Managing Director
Public Company Transformation

 

 

Once a company is public, the event is often celebrated and the organization emits a collective sigh of relief. But then the next daunting question looms: “What’s next?” Recently, I had the opportunity to discuss this very topic on a podcast with my colleague Andrea Spinelli, a director in our Business Performance Improvement practice. The key aspects of a post-IPO environment, which we discuss in more detail during the podcast, include:

  • Transition from “project” to “process.” Now that the pre-IPO scramble is in the past, companies need to focus on designing, operating or enhancing processes within the organization to meet the financial reporting and other requirements for public companies.
  • Forecast the business. Forecasting can be a fairly complicated and difficult process that is often overlooked when a company is considering its IPO readiness – but it is something public companies are expected to do competently.
  • Invest in technology. There is a higher expectation for increased capability maturity from a public company. This expectation runs throughout the organization and includes the technology automation required to manage the business. Manual processes, for example, are more prone to error and create data and other integrity risks, and technology is key to minimizing those risks.

The podcast discussion provides insight on these points and more, and is of interest to both pre- and post-IPO companies. I urge you to listen at the link below when you have time, and send us a comment if you like.

Podcast: So You’ve Gone Public – What’s Next?

 

Is Your Company Private? The SEC Still Has Advice for You.

Steve HobbsBy Steve Hobbs
Managing Director, Public Company Transformation

 

 

 

At Protiviti, we routinely counsel private companies that a good governance and control structure is a sound business strategy for any company, and particularly for fast-growth companies with outside investors. If you don’t believe us, just ask the Securities and Exchange Commission (SEC).

Recently, SEC chair Mary Jo White gave a speech at Stanford University, directly addressing private companies. “Being a private company comes with serious obligations to investors and the markets,” White said. “For the new and evolving markets to be successful, all investors need confidence that they are being treated fairly and that the full range of risks are transparently disclosed.”

She went on to say, “Some of the principles that characterize public companies – transparency with investors, controls on financial reporting, strong corporate governance – have applicability and relevance to private companies, especially those pre-IPO companies that aspire to go public, and should not be overlooked or avoided, whether or not mandated by federal law or a SEC regulation.”

So, what are those pre-IPO “musts” that private companies should do now to create good governance and control structure? It comes down to two key pieces of advice:

  • Start early. Understanding the timeline of events and transformation in an IPO process is key. We recommend certain tasks be done prior to an IPO. Such tasks include evaluating the internal control and governance environments and identifying areas of risk as well as areas for improvement.
  • Know the potential issues before they arise. There are a number of issues that companies typically face during the first year of being public. If you plan properly, you can address most of these issues prior to the IPO, and then identify and address the rest as they evolve. Examples include lack of internal buy-in or understanding of the importance of proper controls, minimally documented policies and procedures, and internal control gaps.

Finally, I blogged not long ago about our latest Guide to Public Company Transformation. It contains a wealth of information, in a helpful Q&A format. It’s a good way to take care of the second point I make here – knowing the issues. The early start, that’s up to you.

Guide to Public Company Transformation Answers What You Always Wanted to Know About the IPO and Beyond

Steve Hobbs 2

By Steve Hobbs
Managing Director, Public Company Transformation

 

 

 

If you’re preparing to take your company public, you surely know you have a lot of new reporting and legal requirements to meet, and that your organization will require a number of changes. You may also know that you will need help in this process, or at least some good guidance.

The latest edition of Protiviti’s Guide to Public Company Transformation: Frequently Asked Questions, released last month, offers just such guidance. It’s a comprehensive and helpfully organized 55-page reference that organizations can use to find an answer to just about every question during the exhilarating and exhausting time surrounding an initial public offering (IPO) – from when is the best time to go public to how to make sure transformation efforts, including Sarbanes-Oxley (SOX) compliance, are maintained in the post-IPO period.

An IPO frequently requires a complete company transformation. Newly public companies may need to upgrade their financial reporting processes, information technology (IT) environments, as well as their governance, risk and compliance (GRC) capabilities. They will need to meet and maintain compliance with SOX and other financial reporting requirements, none of which are easy or straightforward.

While ringing the bell is perhaps the most exciting moment in an IPO journey, the actual transformation work behind the scenes is just beginning. Once listed on the exchange, the company needs to continue to evolve its functions, transforming itself into a business that meets and reports on an entirely different set of public and regulatory expectations. It’s a lengthy, complicated process, and mistakes can be time-consuming and costly.

To lessen the burden and increase the chance of success during this transformation, the new edition of the guide places a greater focus on the post-IPO period – in other words, we look beyond the IPO itself to ensure that companies know what’s needed to become – and stay – scalable and fully compliant in the future. This change in focus is reflected throughout the guide, as well as in the guide’s title − we’ve replaced the word “readiness” with “transformation” to indicate what an IPO truly is.

Other new or updated areas in the third edition of the FAQ guide include:

  • A section on developing an executable strategy and action plan prioritization map; this replaces prioritization maps used in previous editions.
  • Updated information on current laws, including the Jumpstart Our Business Startups (JOBS) Act and the Fixing America’s Surface Transportation (FAST) Act.
  • Updates about revenue recognition, including updated accounting standards from the Financial Accounting Standards Board (FASB). That includes a specific update, Revenue from Contracts with Customers, and the FASB’s recently issued new standard on accounting for leases.
  • A discussion about accurate forecasting and budgeting.
  • Updates on IT policy and process-related evaluations and activities.
  • A discussion about data security and privacy strategies and policies.
  • An update on the costs of becoming a public company, and an overview of the largest cost components.

Last but not least, it’s been our goal to make this guide as user-friendly as possible so that executives and managers can continue to consult it at every step of the process – let us know what you think in the comments.

And we will continue this conversation on April 26, in a webinar on the challenges faced by growing companies. You can register here.

FAST Act Paves the Road for Streamlining IPOs

Steve Hobbs 2By Steve Hobbs
Managing Director, Public Company Transformation

 

 

 

Good news for small companies considering an IPO. On December 4, 2015, President Obama signed the Fixing America’s Surface Transportation Act (the FAST Act). Aside from directing transportation spending, this act includes provisions relevant to startup companies and companies seeking to pursue the IPO path. Below, I’ve outlined the major ways in which this act affects so-called “emerging growth companies,” or EGCs – defined as companies with revenues of less than $1 billion in their most recent fiscal year – by potentially reducing the costs related to initial filings and allowing them to keep their information confidential longer.

  1. Longer confidentiality period. Under the JOBS Act, which created the EGC category, a company that meets that definition needs to publicly file a registration statement for its IPO no fewer than 21 days before the start of its roadshow. Under the FAST Act, this time period has been reduced to 15 calendar days.
  2. Maintaining EGC status longer. In some cases, companies that have started the IPO process as EGCs have lost that status – for example, if the SEC review process continued past the end of the fiscal year in which the issuer crossed over the $1 billion revenue threshold. Under the FAST Act, such a company would remain an EGC through the earlier of either its IPO date or the 1-year anniversary of it otherwise losing EGC status. By retaining this status, the company is entitled to reduced regulatory and reporting requirements under the Securities Act and the Exchange Act.
  3. Reduced disclosure requirements. The FAST Act permits EGCs to omit historical financial information from their initial confidential submission or public filing of the IPO registration statement if this historical financial information would not be required in a registration statement (S-1 or F-1) at the time of the road show.For example, EGCs are currently required to include 2 years of audited financial statements in their public IPO filings. For some issuers, the timing of the IPO process may be such that the fiscal year would complete while the review process is still going on, and therefore the company would need to add audited financial statements for that most recent year. Under the FAST act, in a situation like that, financial statements for the earlier year would not be required in the registration statement. Instead of going through the expense and effort to audit and include financial statements from that prior year, the issuer could simply omit that year from the initial and subsequent filings.

These provisions do not free small companies of the onerous task of preparing and filing their IPO-related financial statements but they do provide some relief, including a longer confidentiality period.

3 “Musts” for Rapidly Growing Companies – A Conversation with Lumosity and Oracle

Steve HobbsBy Steve Hobbs, Managing Director
Protiviti’s Public Company Transformation practice

 

 

Earlier this month, I had the pleasure of sitting down with the Tyler Chapman, Director of Finance at Lumosity and Jeff Henley, Oracle’s Executive Vice Chairman, to discuss the challenges that rapidly growing companies face, and what these companies, such as Lumosity, can do to handle these challenges successfully. Our entire conversation will be available as a webinar in the fall. For now, I’d like to share with you the top 3 takeaways from our discussion:

  1. Address the finance function. When a company is experiencing fast growth, as Lumosity has in recent years, it’s pretty common for the supporting functions, such as finance, to lag behind the rest of the business. To properly address this challenge, leadership must answer these questions:
    • When do we start dedicating resources and funds to building out the finance function?
    • How do we efficiently build out the finance function so that it is effective in supporting the business now and has the ability to scale with the business in the future?
  2. Implement an effective technology solution. Companies must choose an enterprise resource planning (ERP) platform and other technology applications that will be able to scale with the growth of the business and be able to handle complex challenges. This technology must be able to work with existing systems for a streamlined approach.
  3. Prioritize and plan. There are many “make-or-break” decisions to be made throughout the growth process. It is important to logically prioritize foreseeable challenges and have a plan to address each one.

This is only a glimpse of the expertise shared in our discussion. To hear more from these experts, join us for a webinar on August 25 at 10 a.m. PST (1 p.m. EST). To learn more about future events and webinars,  subscribe to our IPO Insider newsletter.

IT Controls for Tech Startups? Yes, It’s Possible.

Steve Hobbsby Steve Hobbs, Managing Director
Leader of Protiviti’s Public Company Readiness Practice

 

 

 

For cutting-edge tech companies focused on not just staying ahead of but shaping the technological curve, compliance issues are hardly a top priority. In fact, it is common for these companies to treat the subject with disdain, and view it as running counter to a tech startup’s innovative, entrepreneurial and fast-paced culture.

Placing compliance on the back burner, however, can be costly, especially as a company grows its customer base or considers an initial public offering (IPO). A lack of IT controls not only could disrupt filing deadlines and cause headaches at audit time, it can also turn away cloud providers’ customers who themselves have to prove the presence of controls to their auditors.

Consider this:

  • Public companies are required to establish effective IT general control (ITGC) frameworks to comply with the Sarbanes-Oxley Act. This includes areas such as change management, data quality/governance and disaster recovery.
  • Cloud and other service providers increasingly are being asked to provide Statement on Controls (SOC) reports for the IT general control frameworks associated with their customer-facing systems environments.
  • The Public Company Accounting Oversight Board (PCAOB) and the new COSO framework have introduced requirements for financial controls assessment and increased scrutiny of ITGC frameworks and IT risk management.

In the face of these demands, what is a tech startup to do? Many find themselves halting development activities and backtracking to provide adequate evidence of approvals and other controls to audit teams. This is a time-consuming and disruptive process that can cause frustration and, in the end, may still fail to satisfy external auditors and customers.

A better approach is to move away from traditional control checklists and templates to a more flexible ITGC framework compatible with innovative software development practices. By matching the controls environment to their non-traditional business practices instead of vice versa, tech companies can strengthen controls and achieve compliance objectives without compromising flexibility, speed, drive and ingenuity.

Two strategies towards building this new framework are process rationalization and agile activity alignment.

  • Process rationalization: Companies can reduce process redundancy (rationalize processes) by aggregating similar but unconnected processes used by different teams under common control activities, which leads to more centralized controls and reduced time in applying them. This is especially true in areas such as software development and access management.
  • Agile activity alignment: In agile software development, approvals could be shifted to the end of each development iteration rather than at every sequential development phase. This ensures control while cutting down on administrative effort that doesn’t contribute to the production of quality software.

Is your company feeling the pressure to put better ITGC controls in place? Asking the following questions should help you get started:

  • What systems and processes are in scope for the purpose of your compliance audits (SOX or SOC)?
  • What areas are in need of additional controls?
  • What existing activities can be used to mitigate key risks?
  • What alternative approaches can be used to mitigate key risks?
  • What is the future-state vision for your controls framework (generating a backlog of improvements, leveraging automated activities, etc.)?

Customers demand speed, agility and assurance, and regulators demand formalized controls. Emerging tech firms can meet these demands without hampering their speed and innovation using out-of-the-box thinking and the approach we outlined here.

What control challenges does your tech company face? Let us know in the comments.